Analysts Cut Q1 Earnings Expectations Despite Rising Markets

EPS estimates for S&P 500 falls by widest margin in years

 A financial professional looks over at his screen on the floor of the New York Stock Exchange.

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Analysts cut earnings estimates by a larger margin than average in the first quarter as a bank liquidity crisis added to concern about a looming recession.

Key Takeaways

  • Analysts lowered Q1 earnings per share (EPS) estimates for S&P 500 companies by 6.3%, a larger decrease than the 5-, 10-, 15-, and 20-year averages.
  • EPS estimates for the broader MSCI USA and MSCI ACWI indices also dropped over the same period.
  • Materials, healthcare, information technology, and communication services are among the sectors with the largest predicted EPS declines.
  • Concern about bank liquidity following the collapse of Signature Bank and SVB, as well as fears of a pending recession, may drive down estimates.

The bottom-up Q1 EPS estimate-an aggregation of median forecasts for each company in the S&P 500 Index-dropped 6.3%, to $50.75. Analysts have lowered quarterly earnings estimates by an average of 2.8% over the last five years and 3.8% over the past 20 years. Almost 75% of the first quarter earnings guidance offered by S&P 500 companies has been negative.

The phenomenon isn't only for S&P 500 companies. Analysts have also lowered estimates for the MSCI USA Index and the MSCI ACWI over the same period. Likewise, analysts also cut S&P 500 EPS estimates for all of 2023 by 3.8%, a wider margin than the 5-, 10-, 15-, and 20-year averages.

The sudden failures of Signature Bank and Silicon Valley Bank prompted broad concern about liquidity, on top of risks posed by inflation and a potential recession. Widespread pessimism in earnings outlooks could also be due to expected poor performance by the materials, healthcare, information technology, and communication services sectors.

Analysts have lowered their estimates for 79% of materials sector stocks, with a predicted earnings decline of 36% sector-wide. The semiconductor industry's earnings are expected to fall 43% from last year. Nonetheless, stocks in both sectors rose over the quarter, with the materials sectors rising 2.1% and the PHLX Semiconductor Sector gaining 27% on enthusiasm around AI spending.

One effect of the shift in predicted EPS is a change to the forward 12-month P/E ratio for the S&P 500, which increased to 17.8 from 16.7 during the first quarter. The price of the index increased at the same time as EPS estimates fell. In the 10 years prior to COVID-19, the index's P/E ratio averaged 15.5.

Article Sources
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  1. FactSet. "Larger Cuts Than Average to EPS Estimates for S&P 500 Companies for Q1."

  2. FactSet. "Earnings Insight," Pages 1-2.

  3. Yardeni Research Inc. "Global Index Briefing: Net Earnings Revisions," Pages 3-4.

  4. Yahoo! Finance. "What Should Investors Expect For the 2023 Q1 Earnings Season?"

  5. Yahoo! Finance. "PHLX Semiconductor Sector."

  6. FactSet. "Earnings Insight," Pages 5-7.

  7. S&P Global. "S&P 500 valuations historically high even after drop from 2020 peak."

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